Consider two local banks. Bank A has 100 loans outstanding, eachfor $1.3 million, that it expects will be repaid today. Each loan has a3% probability of default, in which case the bank is not repaidanything. The chance of default is independent across all the loans.Bank B has only one loan of $130 million outstanding, which it alsoexpects will be repaid today. It also has a 3% probability of not beingrepaid. Calculate the following:a. The expected overall payoff of each bank.b. The standard deviation of the overall payoff of each bank.a. The expected overall payoff of each bank.The expected overall payoff of Bank A is $decimal places.)million. (Round to two

Expected payoff and standard deviation are important concepts in statistics and finance. They are…

Answered: a. The expected overall payoff of each…

Business

Finance

a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Related questions

Q: explain the optimal size of a bank’s liquidity buffer

A: Liquidity buffer is defined as the stock of liquid assets, where the banking companies used to…

Q: he perc

A: Introduction : In simple words, To create a budgeted collection of financial reports, the…

Q: Which risk ratios best answer each of the following financial questions? a. How quickly is a company…

A: Risk Ratio: This ratio indicates the health of the company. Here health means that the capital…

Q: Using the macroeconomic environment of a bank explain the effect on margin. Provide an example of…

A: Margin is referred to as the type of deposit that an investor uses to place with their broker at the…

Q: In the United States economy, the interest rate is: a. the equilibrium cost of borrowing capital. b.…

A: Interest rate is the cost of borrowing capital which is expressed in percentage terms. The Federal…

Q: What is the first step in calculating the lender's effective yield and calculating the borrower's…

A: Amortization schedule refers to the statement showing the details of the loan amount, interest…

Q: Please select whether the following statements are true or false. As long as the discount rate is…

A: The federal funds are the excess funds of the commercial banks and other financial institutions that…

Q: decrease in reserve requirements could lead to an A. increase in bank lending. B. increase…

A: The Money supply and demand of money is affected by reserve requirement of bank which are placed by…

Q: Explain how a change in interest rates in the economy would beexpected to affect each component of…

A: Introduction: The interest rate is the percentage value of the total borrowed amount that a…

Q: How does a bank try to achieve the best possible risk adjusted return on its overall loan portfolio?

A: The possibility of a loss arising from a borrower's inability to repay a loan or meet legally…

Q: Consider the monetary policy rule under financial frictions. If f >0 the prevailing market real the…

A: Consider the monetary policy rule under financial frictions.

Q: Explain the interest rate sensitivity of government debt as a function of: i) its maturity and ii)…

A: Financing price affectability may be a proportion of what quantity the value of a fixed-pay resource…

Q: Explain the valuation of present value of long-term notes receivable. NOTE: Present your own…

A: solution Explain the valuation of present value of long-term notes receivable. Long term receivable…

Q: Which of the following best describes the constant-growth dividend discount model? a. It is the…

A: Constant-Growth Dividend Discount Model: Growth that is unabated The Dividend Discount Model, often…

Q: 3. Future value The principal of the time value of money is probably the single most important…

A: Time value of money: This concept tells us that a sum of money received today is worth more than a…

Q: The financial performance of both Commercial Banks and Savings Banks is measured using the Net…

A: The net interest margin is referred as the net benefit of lending which derived from the lending and…

Q: Equilibrium in the market for bank reserves determines ?

A: Hi, since there are multiple questions posted, we will answer the first question. If you want any…

Q: QUESTION Briefly differentiate between money market and capital market in relation to: i. risk…

A: The overall financial market can be divided into money market and capital market. Both these…

Q: please use a specific example to compare what is the discount rate% and what is the investment rate…

A: Explanation:- Discount rate % on treasury bills: The income generated on the T-bill is equal to…

Q: bonds

A: Investment options are of various types. Some investments carry higher risks while some would carry…

Q: Draw and explain the impact of budget deficit on loanable fund market and on the macroeconomic…

A: Investment Savings and investment spending on the physical capital are the categories of the real…

Q: A bank is least likely to use which of the following ratioswhen analyzing the likelihood that a…

A: Ratio Analysis: This refers to the performance measurement of the business, in order to know the…

Q: banking

A: Introduction: Banking can be defined as activities involving accepting money from both individuals…

Q: Changes in interest rates may change the market values of the bank's assets and liabilities by…

A: Price risk is the value of the portfolio or investment due to various factors like volatility, poor…

Q: Burden ratio A. Calculate the burden ratios for Bank X and Bank Y and what can you conclude from…

A: The Burden Ratio is the measure of the difference between Non-Interest Income and Non-Interest…

Q: Discuss briefly the liquidity preference theory (LFT) and differentiate it from the loanable funds…

A: Liquidity is referred as the degree, where the security used to buy or sell quickly in the market at…

Q: which of the following past returns should mutual funds publish in their annual reports? A. Excess…

A: Mutual fund these are the type of investment in which there is large pool of money from money…

Q: Create a plan of investment on a bank and solve its interest with respect to the rate offered and…

A: Simple interest is computed on the loan's initial main amount, but compound interest is calculated…

Q: What role does the pro forma cash budget play in financial forecasting.

A: Given: The role of pro forma cash budget in the financial statement.

Q: Who decides about the level of reference rate? Select one alternative: financial market…

A: Reference rate is the benchmark interest rate used to set other interest rate. Example - LIBOR.

Q: Inflation targeting refers to conducting ________ policy so as to commit the central bank to…

A: Inflation targeting is a monetary system where the Federal Reserve establishes as its objective a…

Q: The implications of QE ( quantitative easing) for the cash rate; yields on federal treasury bonds;…

A: QE ( quantitative easing) is a special situation of monetary policy to use in special economic…

Q: Term Time value of money Passive income Net Worth Credit Score / Credit rating Risk Evaluation…

A: Definition: The time value of money refers to the concept that money available today is worth more…

Q: What would be the type of the quantity used in the break even analysis for Banks? Ex: Number of…

A: BREAK EVEN POINT

Q: If the risk premlum on a commercial bank rises, so will the required rate of return by lInvestors…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly…

A: Additional fund needed is the funding that company would require for coming year based on the sales…

Concept explainers

Loanable Funds Theory

The loanable funds theory is a neoclassical theory that determines the interest rate where the demand for loanable investments and supply of loanable funds intersect. To determine the interest rate, this theory employs linear regression and a demand curve. At the equilibrium point, demand for borrowings and demand for the issuance of borrowing funds are inextricably linked. This point of equilibrium should equalize demand and the supply of money available for borrowing.

Question

Consider two local banks. Bank A has 100 loans outstanding, each
for $1.3 million, that it expects will be repaid today. Each loan has a
3% probability of default, in which case the bank is not repaid
anything. The chance of default is independent across all the loans.
Bank B has only one loan of $130 million outstanding, which it also
expects will be repaid today. It also has a 3% probability of not being
repaid. Calculate the following:
a. The expected overall payoff of each bank.
b. The standard deviation of the overall payoff of each bank.
a. The expected overall payoff of each bank.
The expected overall payoff of Bank A is $
decimal places.)
million. (Round to two

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Expected Pay-Off Calculation

VIEW

Step 3: Standard Deviation Calculation

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 4 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Construct a bank balance sheet with the following items : reserves , deposits , loans , securities , capital , and debt . Choose values so that the reserve -deposit ratio is 10 percent and the leverage ratio is 10. Give an example of a change in asset values that would push bank capital to zero . What happens when bank capital is gone ?
please answer asap for a good rating
8. According to the Loanable funds' theory, how are interest rates determined?9. Compare and contrast three different money market securities in terms of issuer, return, risk and tradability/liquidity.10. Explain the role of non-depository financial institutions within the financial sector? Discuss the core functions of any three of these institutions.
1. What is the most accurate measure of interest rates? a) Current Yield b) Nominal Interest Rate c) Simple Interest Rate d) Yield to Maturity
Describe how taxes and tax adjustment coefficients influence investment rankings?
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people's time preferences for consumption. This is the rate on a Treasury bill or a Treasury bond. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond's credit rating; the higher the rating, the lower the premium added, thus lowering the interest rate. It is based on the bond's marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate. As interest rates rise over time, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain over the life of the…
Definition of size ratio and growth ratio for comparing between Banks
The nominal interest rate is adjusted based on _______ from the real interest rate. A. government controls B. inflation C. income growth D. exchange rate movements
What is the relationship between the stock market and the real economy in terms of measures such as gross domestic product (GDP), inflation, and interest rates? Please provide references and links if any.
The WACC is a weighted average of the costs of debt, preferred stock, and common equity. How should the capital structure weights used to calculate the WACC be determined? Would the WACC depend in any way on the size of the capital budget? How might dividend policy affect WACC? Explain
Show the calculation of the following solvency ratios: (1) the debt to equity ratio, and (2) the times interest earned ratio.
What is the prime rate and how is it used by financial institutions?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS